Strategic Management Accounting Essay

3107 words - 13 pages

For any operating business, the primary goal is not just to earn profit but also to maximize their profit margins. As normal convention dictates profit as the difference between revenue and cost, how much profit an entity makes depends largely on how much revenue it earns. Therefore, price and quantity of goods sold are the two most direct influence on the profit of every entity and this makes a not only accurate but also strategic pricing decision a necessity for any business that wants to thrive.
There are many methods and models available for managers to use in order to fix price for a varying range of products and services, depending on the position of the company in the market and the ...view middle of the document...

Needless to say, when entering such new and foreign markets, it is easiest and safest to develop a price based on the most accurate available information, internal cost figures. In arriving to the aforementioned base price or marked up price, managers usually use two types of bases: variable cost and full cost, each which carries its own advantages and disadvantages. In other words, there are different circumstances which render the use of one or the other or both bases so that managers can make an informed decision. And so, the question left is when to use what and for the case of this particular company, which one is the most appropriate.
Using variable cost for this pricing mechanism certainly makes it easier for managers in the sense that it offers more detailed information as the analysis of variable cost is separated from that of fixed cost, thus allowing an accurate cost-volume-profit analysis to be scheduled and accordingly, prices for different volumes of output can be planned without much difficulties. This not only arms managers with certain flexibility against changes in the external environment but also some sort of freedom to choose the most appropriate volume of production that is the most comfortable for the operation of the company and produces the most agreeable profit margin. Thus, this makes variable cost a perfect cost base for short term decisions as it facilitates the analysis of incremental costs and revenues, which is essential in allowing managers to form opinions on a short term basis as fixed costs stays the same and thus, is irrelevant in several decision such as whether or not the company should accept a special order or a make-or-buy decision.
On the other hand, in the long run, a company has to be able to cover all of its costs, both variable and fixed in order to survive and as a result, using only variable cost as a basis for pricing decision does not make much sense and it is rather unwise for a company to assign a very high mark-up on its variable costs hoping that fixed cost will be covered as there are many uncertainties and unpredictability in running a multinational business as it is and full-cost plus pricing provides much needed assurance for managers. Moreover, determining price level is as a delicate decision as it gets. The price needs to be high enough to leave a profit margin and low enough so that customers will not be driven away. In the wake of this reality, in the actual business world, according to Shim and Sudit (1995), more than 60% of businesses choose to set their price with full costs as a base rather than variable cost.
While many specialists and experts like Thepot and Netzer (2008) argue that full-cost pricing goes against the norms of economics principles which dictates that price must be set where marginal cost equals marginal revenues, thus favoring marginal or variable costing method, in fact, it can be interpreted that in the long term (the ideal situation that absolutely...

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